The North Carolina Business Court recently approved a “disclosure settlement” of a merger challenge, suggesting that in North Carolina such settlements may remain a viable means of resolving merger lawsuits – at least where the disclosures provide some minimum demonstrable benefit to shareholders. Whether it will continue to be profitable for shareholders’ attorneys to bring such lawsuits in the first place remains to be seen.
Shareholder litigation has long been inevitable following the announcement of a merger. Such lawsuits are usually quickly settled, with the key features of the settlement being: (i) the filing of additional merger-related disclosures, (ii) a release by all shareholders of all merger-related claims, and (iii) a six-figure payment to the plaintiffs’ lawyers.
As we have detailed previously (see here), Delaware courts have become increasingly skeptical of these “disclosure settlements.” In the Trulia case, the Delaware Court of Chancery explained that it would “be increasingly vigilant in applying its independent judgment to its case-by-case assessment of the reasonableness of the ‘give’ and ‘get’ of such settlements.” The Court added that “disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed.”
The North Carolina Business Court previously signaled that it shared some of the concerns expressed by the Court of Chancery in Trulia, while leaving open how best to address those issues under North Carolina law (see here). In In re Krispy Kreme Doughnuts, Inc. Shareholder Litigation, the Business Court has now provided further guidance, noting certain distinctions between North Carolina and Delaware law and suggesting the Court may largely defer to the parties’ judgment as to the adequacy of the bargained-for disclosures.
The Krispy Kreme case followed the standard template: a merger was announced, multiple lawsuits were brought on behalf of shareholders, and the parties promptly reached a proposed disclosure settlement. The proposed settlement was then presented to the North Carolina Business Court for approval. In deciding whether to approve the settlement, the Court observed that “unless the value of the supplemental disclosures are plainly disproportionate to the scope of the proffered release, trial courts most often are less well-equipped to measure a disclosure’s worth than are competent and experienced counsel.” The Court therefore held that, provided there is minimal opposition from shareholders, the Court is unlikely to set aside a settlement “if the disclosures are not plainly immaterial and the release is reasonable.” Applying this standard of review, the Court held that the supplemental disclosures made by Krispy Kreme were sufficiently material and approved the settlement.
It is clear from the decision in Krispy Kreme that the scope of the release given to the defendants remains important. There must, as the Court of Chancery observed in Trulia, be an equivalency between the “give” (the additional disclosures provided by the defendant) and the “get” (the release obtained from the class representatives) for the settlement to pass muster. That standard typically will be met where the release is limited to claims related to or arising out of the merger and does not include, for example, federal securities claims unrelated to the transaction.
In contrast to its relatively deferential posture on the substance of the settlement, the Court suggested it would conduct a more searching analysis of the lawyers’ fee request. The Court held that “trial courts are generally well-equipped to conduct a reasoned inquiry into whether a fee award is reasonably related to the degree to which supplemental disclosures significantly added to the information that was otherwise already available to shareholders.” With that warning, the Court deferred ruling on the request by the shareholders’ attorneys for $350,000 in fees pending additional briefing.
The Court’s ruling on attorneys’ fees will be key to the long-term impact of the Krispy Kreme decision. The size of the fee award and the Court’s reasoning may affect whether plaintiffs’ attorneys continue to deem merger litigation to be worth bringing in North Carolina. Stay tuned.